Accessing Customers' Customers' Money With Joint Checks
A spell of wet weather and some permit delays had slowed a major construction project to a crawl, and now one contractor was delinquent on the payments for the heavy equipment he had rented. With the total amount due approaching $50,000, Finance Manager Ben Torrance of Mustang Tractor and Equipment Company, Inc., (Houston, Texas) had to make a move. The one he chose blended years of credit management experience, an abiding interest in the well-being of his customers, and the advantages of working for a highly competitive, well-capitalized company. Torrance called the customer and arranged a meeting with him and with the general contractor for the project. Once he was satisfied that the project's funding was not in jeopardy, he proposed a joint-check arrangement. On an agreed-upon date, the general contractor would issue a check payable to both the customer and to Mustang. By way of accommodating the customer in his predicament, Torrance would allow him a downtime credit of $20,000. "This made more sense than going out and retrieving the equipment from the jobsite," he notes. "And the customer isn't running up his delinquency with rental charges for equipment he's unable to use. "But I made it clear that we wouldn't issue the credit until the deal was funded. "If we had, we'd have released $20,000 in lien rights. That's something you never want to do, just in case the deal turns ugly." Horror Stories
In Torrance's many years in the business, however, not that many deals have turned ugly. "Most often, we get our money as agreed, so long as we've done our homework. But you do hear these horror stories where suppliers get caught up in negotiations with bonding companies and general contractors that can drag on for a couple of years." Business conditions in general have been stressed since late last year by the combination of bad weather, the repercussions of September 11, and the nationwide economic slowdown. "We've gone from utopia to 'I-don't-know-how-much-worse-it-can-get.' Bankruptcies and hot checks are up. We have to reassure our good customers that we're here for them. A lot of their problems are beyond their control. Many of them work on big projects like shopping centers and subdivisions, and sometimes the money doesn't flow as planned. "But a big part of the problem is that we're the cheapest source of money. When there are wages to pay and other costs like that, we get put on the bottom of the pile." His defenses are careful up-front investigations and quick reactions to delinquencies. Mustang's stated terms are "cash on invoice," but in actuality they tend to be net 30 to 45 days. At 60 days, he has the option of closing the account and putting the customer on COD. "We send notices of our intent to lien, and we discuss the possibility of pulling our equipment off the job," he says. It is at that point that -- as in the case described above -- he may go the project owner to verify that the customer is owned the money and will be paid. He may also propose a joint-check arrangement. Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.
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